During the whole week most of the markets were quite calm, but this is just the hush before the storm. Fundamental trends’ breakthroughs are coming in the major currency markets!
The USDX market
According to the Commitments of Traders report published on Friday 22nd hedgers continued aggregating lower net positions. Despite the fact the USD index continued varying close to 83.00, even more hedgers believe USD is highly overvalued relatively to the major currencies: the hedger COT index stayed on the level of 0% for the second week in a row. Hedger net position declined from -37,545 to -59,683. At the same time, the open interest increased by 7.5% indicating the market is overbought. As a result the COT index is equal to 100% for the 3rd week in a row. The Williams’ Commercial index (WILLCO) also stayed on the level of 0% for the second week in a row.
Both the large speculator and small trader COT indices are equal to 100% for the 2nd week in a row, as well. Less informed portfolio managers and the general public are trying to push the market forward which although is possible. They have been accumulating larger net positions for several weeks; however, USDX stayed below 83.00. Summarizing, all five indicators show the USDX market is “highly overvalued”.
Figure 1: USDX futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
The market has been varying close to the monthly Fibonacci 23.6 and the resistance level at 82.90 for the past three weeks. Traders should be ready to go short at any time during the next week. However, there is a possibility the market will go slightly up (till 84.00) prior to the uptrend switch to downtrend.
The EURUSD, GBPUSD, and USDCHF markets
While the USDX is considered to be overvalued by hedgers, according to trader positions in the EURUSD market, the EUR is not overvalued anymore relatively to the USD. According to the Commitments of Traders reports, the hedger COT and the Williams’ Commercial indices are equal to 59% (+14 percent points) and 61% (+15 percent points), respectively. The open interest COT index continued declining and dropped to 24% meaning more and more traders are exiting the market in a panic of the downtrend.
The large speculator and small trader COT indices are equal to 42% and 32%, respectively. Observing trader behavior we can say, it is too early to expect the uptrend in the market. It is more likely that traders will observe current downtrend continuation on the market.
Figure 2: EURUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
The EURUSD exchange rate continued consolidating, however a slight decrease was observed during the week. If earlier the weekly level at 1.3000 worked as a support, now it works as a resistance level limiting uptrends and supporting negative expectations regarding the EURUSD market. There is a high probability that the market will reach 1.27 where Fibonacci level and support levels are situated. This downtrend may also push the USD index up.
While the EURUSD exchange rate was slowly decreasing during the week, the GBPUSD exchange rate was increasing. According to the COT reports, all three categories of traders indicate the British pound is significantly undervalued relatively to the USD since 5th of February! The hedger COT and WILLCO indices are equal to 100% and both the large speculator and small trader COT indices are equal to 0% indicating the GBPUSD exchange rate is below its fundamentals. Finally, the open interest is dropped in the market by roughly 26%. However, traders should be careful because this decline is more related to traders’ position liquidation due to futures expiration in March. Still, excluding the open interest significant change, all traders have been indicating the market is highly undervalued since February, therefore the market may switch the trend at any time and maybe it has already been done.
Figure 3: GBPUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
During the past week the GBPUSD exchange rate returned to 1.52, where a monthly support is situated. There is still a possibility for a downside move in the market. However, it is more likely to observe market consolidation during the next week and uptrend on the market.
The last currency market I would like to bring to your attention is the USDCHF exchange rate, which according to the COT reports published on Friday 22th is overvalued. After the exchange rate slightly declined (from 0.96 to 0.94-0.95), the COT indicator deviated from their extreme values. The hedger COT index dropped to 95% (-5 percent points) and the WILLCO stayed at 100%. At the same time, small trader and large speculator COT indices increased to 1% and 9%, respectively. Both were equal to 0% according to last week COT reports. This change may be driven by the exchange rate variation. However, it was quite insignificant in fundamental terms and most probably was driven by traders’ massive position liquidation due to futures expiration in March. As in case of the GBPUSD market, the open interest in the USDCHF market dropped by roughly 26%. As a result, the COT index declined from 100% to 47%. Summarizing, the market is still considered to be highly undervalued meaning hedgers should be ready for the uptrend in the CHFUSD and the downtrend in the USDCHF market.
Figure 4: CHFUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
It is most probably the market will not reach 0.97, where a daily resistance and monthly Fibonacci 50.0 are situated. Traders should expect market consolidation during the next week and later a downtrend in the USDCHF market.
The forecast wrap-up is the following:
· The USD index consolidation.
· The EURUSD rate decrease till 1.27.
· The GBPUSD rate consolidation.
· The USDCHF rate consolidation.
Information about the analytical review and forecasts
The fundamental analysis is based on the Commitments of Traders (COT) data published by the Commodity Futures Trading Commission (CFTC) and the cross-market connections. The technical analysis is based on support and resistance levels.
More information regarding the COT data can be requested from the author of this review or found on the Commodity Futures Trading Commission’s website www.cftc.gov.
Information regarding the interest rates mentioned in this article can be found on the ECB and BoE official websites.
The COT Indices used in this review are calculated using 26-week historical data. The Standard Deviation indicator takes into account volatility of last 5 days. The volume indicator takes into account volume in the most liquid futures market. For example, for the EURUSD it is the EURUSD Futures traded on CME Group exchanges. The Delta Volume indicator shows a difference between volumes of orders based on ASK and BID prices.
Make your investment decisions only after a careful consideration. The additional analysis is needed to identify the points for the entrance into and exit from the markets bearing in mind your own money management strategy. Author provides the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.
